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O C C A S I O N A L   P A P E R      
Improving Large Taxpayers' Compliance:
A Review of Country Experience

By a Staff Team Led by Katherine Baer

©2002 International Monetary Fund
April 29, 2002



  1. Introduction
    Objectives of the Study
    Methodology Used
    Main Reasons for the Spread of LTUs in Developing and
       Transition Countries

  2. Basic Characteristics of LTUs in Developing and
       Transition Countries

    Focus on Large Taxpayers Prior to LTU Establishment
    Main Reasons for Implementing the LTU
    Context of LTU Establishment
    Legal Basis for Establishing the LTU
    Taxes Administered by the LTU
    Criteria Used to Identify the Largest Taxpayers
    LTU Organization, Reporting Lines, and Functions/Structure
    LTU Procedures
    Staffing, Salaries, and Benefits

  3. Review of LTU Performance
    Advantages and Risks of LTUs
    Review of LTU Effectiveness by Regions

  4. Conclusions
    Advantages of Establishing an LTU
    Risks Associated with LTU Establishment
    Lessons Learned
I. Summary Tables of LTU Survey Responses
II. Country Responses to LTU Survey and LTU Survey Form
1.1. Types of Organizational Structures for Tax Administration
1.2. Large Taxpayer Compliance Operations in the Netherlands
1.3. Large Taxpayer Compliance Operations in Australia
1.4. Large Taxpayer Compliance Operations in New Zealand
1.5. Large Taxpayer Compliance Operations in the United States
1.6. Large Taxpayer Compliance Operations in the United Kingdom
3.1. Large Taxpayer Compliance Operations in the Russian
3.2. Large Taxpayer Compliance Operations in Bolivia
Text Tables
1.1. Spread of Large Taxpayer Units
1.2. Concentration of Tax Collection in Selected Countries, 1999
3.1. Indicators of LTU Performance in Selected Countries
   (Advantage Indicators)
3.2. Indicators of LTU Performance in Selected Countries
   (Risk Indicators)
Appendix Tables
A1. Main Reason for Establishing a Large Taxpayer Unit
A2. Legal Framework for LTU Operations
A3. Taxes Administered by the LTU, 1999
A4. Criteria Used to Identify the Largest Taxpayers
A5. Number of Large Taxpayer Offices/Branches, 1999
A6. Supervision/Reporting Lines for Large Taxpayer Office
A7. Organizational Structure of the Large Taxpayer
A8. Tax Collection and Payment Procedures Used by the LTU,
A9. Types of Audits Undertaken by the LTU, 1999
A10. Collection Enforcement Functions of the LTU
A11. Number of Staff in LTU/Large Taxpayer Audit Unit, 1999
A12. Salaries and Benefits of LTU/Large Taxpayer Audit Unit Staff,
A13. Country Responses to LTU Survey


Beginning in the 1980s, the IMF has recommended that member countries facing revenue crises and looking to strengthen tax administration establish large taxpayer units (LTUs) to increase control over the largest taxpayers1 and improve large taxpayers' compliance in the short and medium term.2

This paper provides an overview of the organization, systems, and procedures used by tax administrations in about 40 countries to monitor the compliance of the large taxpayers. It also reviews the effectiveness of large taxpayer operations in selected developing and transition countries where the IMF has recommended their establishment.3 Information provided by tax officials in the countries surveyed, as well as IMF staff and IMF experts' views on the effectiveness of large taxpayer operations in these countries, form the basis for this discussion.

Case analysis indicates that countries may gain significant benefits from setting up special operations to control the compliance of the largest taxpayers. It also shows that certain risks need to be addressed. Clearly, the experience of many developing and transition countries shows that setting up special operations to control large taxpayer compliance has resulted in increased compliance and more effective tax administration overall. Such special operations have focused tax administration efforts on relatively few taxpayers that account for a large percent of total tax collection. Many of the countries surveyed reported that establishing an LTU helped them address major operational weaknesses in tax administration and improve core tax administration functions. In addition, in many countries the LTU has been a pilot for the tax administration to test reforms later extended to the rest of the taxpayers. These include the self-assessment of taxpayer liabilities, single taxpayer master files, unique taxpayer identification numbers, an organizational structure based on the main tax administration functions, electronic filing, and new computerized information systems.

The trend to establish LTUs or organizational arrangements based on large taxpayers in developing and transition countries is similar to efforts in developed countries (e.g., Australia, France, the Netherlands, New Zealand, the United Kingdom, the United States). Tax administrations in these countries are reorganizing their operations around segments of the taxpayer population (especially according to taxpayer size) because the various segments require different strategies to manage their tax compliance and also because these distinct segments present different revenue risks.

At the same time, risks are associated with establishing an LTU that tax administrators and other public finance officials should consider. If the LTU is only partly established,4 it will not reach its potential to improve the operations of the tax administration and increase large taxpayer compliance. Thus, not only is an important opportunity for reform lost, but the LTU loses credibility as a vehicle for modernizing tax administration. Unfortunately, there are several such examples among the transition countries.

Sustaining the reforms introduced through the LTU, and extending the modernization to the entire tax administration—including the tax offices dealing with small and medium-size taxpayers—have been major issues for several countries. Without consistent political and management support, as well as the needed financing and staff, LTUs that were initially successful can succumb to the same problems that existed before their implementation.

Further risks specific to the operation of the LTU include overemphasizing the administration of the large taxpayers and ignoring the medium-size and small taxpayers; failing to provide specific types of controls for the large taxpayers (e.g., those to ensure compliance with return filing and payment obligations); assigning too many taxpayers to the LTU, thereby rendering compliance management ineffective; and allowing irregular or corrupt practices by LTU officials who are not properly supervised. Related to this, a major challenge for tax administrations setting up an LTU is to attract and retain staff of sufficient caliber to audit complex operations, provide large taxpayers with accurate and up-to-date information, and create a professional work environment that discourages tax officials from engaging in corrupt practices.

Finally, to gauge the effectiveness of the LTU's operations and changes in large taxpayer compliance, tax administrations must identify and compile performance indicators, which are the basis for effective management reporting.

Against this background and from the IMF's experience in assisting member countries to set up and manage large taxpayer compliance operations, important lessons have been learned.

  • For the LTU to be effective and for the large taxpayers' compliance to improve significantly, the government must fully commit to setting up the LTU, providing it with the necessary resources (staffing, physical infrastructure, computers, etc.), and supporting auditing and enforced collection for the largest taxpayers.

  • The long-term effectiveness and credibility of the LTU depends on the government's ability to incorporate the LTU into a broader tax administration reform. This is an area where the IMF could improve follow-up of the initial LTU reform effort.

  • The LTU needs continued reform and modernization, like the rest of the tax administration, to remain effective and to keep up with changes in the economy and the taxpayer population.

  • For an LTU to work properly, it must meet certain minimum requirements (many of which are also applicable to the overall tax administration), including

    • A sound legal framework;
    • Clear and simple criteria for selecting large taxpayers;
    • Standard and transparent procedures;
    • The administration of all the large taxpayers by the LTU;
    • The administration of all national level domestic taxes by the LTU;
    • LTU performance of all core tax administration functions;
    • Clear reporting lines between the LTU and the headquarters office;
    • Appropriate job grading and remuneration of LTU staff;
    • Effective LTU staff training; and
    • Identification and regular compilation of key performance indicators.

  • Even if these conditions are met, the establishment of an LTU cannot strengthen large taxpayer compliance and generate added revenue when there is prolonged downturn in the economy.

  • The experience of the transition countries with LTUs suggests that a positive relationship exists between the successful implementation of an LTU and progress in macroeconomic stabilization and other structural reforms, including tax policy reforms.

  • The most effective LTU operations are based on strong, centralized supervision of operations and limited organizational units. In contrast, the least effective LTUs seem to be those that are highly decentralized.

1Taxpayers that make significant tax payments and that account for a large percent of total tax collection—50 percent or more.
2Operations to control the compliance of the large taxpayers vary according to the type of organizational structure of each tax administration and may be referred to as large taxpayer units, large taxpayer departments (LTDs), large taxpayer offices (LTOs), and so forth.
3The effectiveness of tax administration is measured by the degree of taxpayers' compliance with the tax laws (e.g., the tax administration's capacity to enforce the tax laws), while efficiency reflects the actual costs of tax administration.
4If, for example, not all large taxpayers are administered by the LTU or system of LTUs, the LTU does not perform all major tax administration functions, the LTU lacks appropriate staffing or resources, and so forth.